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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
THE SANTA CRUZ OPERATION, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
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[SCO LOGO APPEARS HERE]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held February 22, 2000
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of THE SANTA
CRUZ OPERATION, INC., a California corporation (the "Company"), will be held
on Tuesday, February 22, 2000, at 3:00 p.m., local time, at The Westin Hotel,
San Francisco Airport, 1 Old Bayshore Highway, Millbrae, CA 94030, for the
following purposes:
1. To elect directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected.
2. To approve an amendment to the Company's 1994 Incentive Stock Option
Plan (the "Option Plan") to increase the number of shares reserved for
issuance under the Option Plan by 3,000,000 shares.
3. To approve an amendment to the Company's 1993 Director Option Plan (the
"Director Plan") to increase the number of shares reserved for issuance
under the Director Plan by 250,000 shares.
4. To approve an amendment to the Company's 1993 Employee Stock Purchase
Plan (the "Purchase Plan") to increase the number of shares reserved for
issuance under the Purchase Plan by 750,000 shares.
5. To ratify the appointment of PricewaterhouseCoopers LLP as independent
public accountants of the Company for the fiscal year ending September
30, 2000.
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on December 30, 1999
are entitled to notice of and to vote at the meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed Proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose or to cast your vote via
the telephone or the Internet. Any shareholder attending the meeting may vote
in person even if he or she has returned a Proxy.
Sincerely,
Steven M. Sabbath
Secretary
Santa Cruz, California
January 21, 2000
YOUR VOTE IS IMPORTANT.
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING,
YOU ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY
AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE OR COMPLETE
YOUR PROXY VIA THE TELEPHONE OR THE INTERNET.
<PAGE>
THE SANTA CRUZ OPERATION, INC.
PROXY STATEMENT FOR 2000
ANNUAL MEETING OF SHAREHOLDERS
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed Proxy is solicited on behalf of the Board of Directors of THE
SANTA CRUZ OPERATION, INC., a California corporation (the "Company"), for use
at the Annual Meeting of Shareholders to be held Tuesday, February 22, 2000,
at 3:00 p.m., local time, or at any adjournment thereof, for the purposes set
forth herein and in the accompanying Notice of Annual Meeting of Shareholders.
The Annual Meeting will be held at The Westin Hotel, San Francisco Airport, 1
Old Bayshore Highway, Millbrae, CA 94030. The Company's principal executive
offices are located at 425 Encinal Street, Santa Cruz, California, 95061-1900,
and its telephone number at that location is (831) 425-7222.
These proxy solicitation materials and the Annual Report to Shareholders for
the year ended September 30, 1999, including financial statements, were first
mailed on or about January 21, 2000 to all shareholders entitled to vote at
the meeting.
Record Date and Principal Share Ownership
Shareholders of record at the close of business on December 30, 1999 (the
"Record Date"), are entitled to notice of and to vote at the meeting. At the
Record Date, 35,300,905 shares of the Company's Common Stock, no par value,
were issued and outstanding. No shares of the Company's authorized Preferred
Stock were outstanding.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of the Record Date as to (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the outstanding shares of its Common Stock, (ii) each director and
each nominee for director of the Company, (iii) each of the executive officers
named in the Summary Compensation Table below and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
Common Stock Approximate
Five Percent Shareholders, Directors Beneficially Percentage
and Certain Executive Officers Owned Owned(1)
------------------------------------ ------------ -----------
<S> <C> <C>
Douglas L. Michels(2).................................. 4,327,676 12.2%
c/o The Santa Cruz Operation, Inc.
425 Encinal Street
Santa Cruz, California 95061-1900
Microsoft Corporation.................................. 4,217,606 11.9
One Microsoft Way
Redmond, Washington 98052-8300
Alok Mohan(3).......................................... 558,582 1.6
Robert M. McClure(4)................................... 128,332 *
Gilbert P. Williamson(5)............................... 123,000 *
R. Duff Thompson(6).................................... 8,500 *
Ninian Eadie(7)........................................ 83,500 *
Ronald Lachman(8)...................................... 142,500 *
John Luhtala(9)........................................ 0 *
</TABLE>
1
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<TABLE>
<CAPTION>
Common Stock Approximate
Five Percent Shareholders, Directors Beneficially Percentage
and Certain Executive Officers Owned Owned(1)
------------------------------------ ------------ -----------
<S> <C> <C>
James Wilt(10)......................................... 386,067 1.1
David McCrabb(11)...................................... 192,948 *
Steven M. Sabbath(12).................................. 99,224 *
All directors and executive officers as a group
(15 persons)(13)...................................... 10,478,463 28.2
</TABLE>
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*Less than one percent
(1) Applicable percentage of ownership is based on shares of Common Stock
outstanding as of the Record Date together with applicable options held
by such shareholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and includes
voting and investment power with respect to shares. Shares of Common
Stock subject to options currently exercisable or exercisable within
sixty (60) days after the Record Date are deemed outstanding for
computing the percentage ownership of the person holding such options,
but are not deemed outstanding for computing the percentage of any other
person.
(2) Includes 274,276 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date. Includes 75,000 shares gifted to the J3D Family
Partnership, of which Douglas Michels is the general partner; and 355,000
shares in a trust account established by Mr. Michels' late father,
Lawrence Michels, of which Douglas Michels is a general partner.
(3) Includes 498,747 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(4) Includes 125,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(5) Represents 123,000 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(6) Represents 8,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(7) Represents 83,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(8) Includes 65,500 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date. Also includes 24,000 shares in trust accounts
established for the benefit of his minor children of which Mr. Lachman is
a trustee. In addition, 5,000 shares are also held by the Ronald and Mary
Ann Lachman Foundation of which Mr. Lachman is a director; Mr. Lachman
disclaims beneficial ownership of these shares.
(9) Mr. Luhtala resigned from his position as Senior Vice President,
Operations, and Chief Financial Officer effective December 10, 1999. He
exercised his options to the extent they were vested, and sold such
shares prior to the record date.
(10) Includes 174,391 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(11) Includes 181,248 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(12) Includes 78,999 shares issuable upon exercise of options to purchase
shares of Common Stock that are exercisable within sixty (60) days after
the Record Date.
(13) Includes 1,833,036 shares issuable upon exercise of options to purchase
shares of Common Stock granted to executive officers and directors of the
Company that are exercisable within sixty (60) days after the Record
Date.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a notice of revocation or a duly executed proxy bearing a later date
or by attending the meeting and voting in person.
Voting and Solicitation
Each shareholder is entitled to one vote for each share held. Every
shareholder voting for the election of directors (Proposal One) may cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares that such
shareholder is entitled to vote, or distribute such shareholder's votes on the
same principle among as many candidates as the shareholder may select,
provided that votes cannot be
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cast for more than seven (7) candidates. However, no shareholder shall be
entitled to cumulate votes unless the candidate's name has been placed in
nomination prior to the voting and the shareholder, or any other shareholder,
has given notice at the meeting, prior to the voting, of the intention to
cumulate the shareholder's votes. On all other matters, each share of Common
Stock has one vote.
This solicitation of proxies is made by the Company, and all related costs
will be borne by the Company. In addition, the Company may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation material to such beneficial owners.
Proxies may also be solicited by certain of the Company's directors, officers
and regular employees, without additional compensation, personally or by
telephone.
Quorum; Abstentions; Broker Non-Votes
The required quorum for the transaction of business at the Annual Meeting is
a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST" or "WITHHELD FROM" a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.
While there is no definitive statutory or case law authority in California
as to the proper treatment of abstentions in the counting of votes with
respect to a proposal, the Company believes that abstentions should be counted
for purposes of determining both (i) the presence or absence of a quorum for
the transaction of business and (ii) the total number of Votes Cast with
respect to the proposal. In the absence of controlling precedent to the
contrary, the Company intends to treat abstentions in this manner.
Accordingly, abstentions will have the same effect as a vote against the
proposal. Broker non-votes, shares held by brokers that are present but not
voted because the brokers were prohibited from exercising discretionary
authority ("broker non-votes"), will be counted for purposes of determining
the presence or absence of a quorum for the transaction of business, but will
not be counted for purposes of determining the number of Votes Cast with
respect to the proposal.
Deadline for Receipt of Shareholder Proposals
Shareholders are entitled to present proposals for action at a forthcoming
meeting if they comply with the requirements of the proxy rules promulgated by
the Securities and Exchange Commission. Proposals of shareholders of the
Company that are intended to be presented for consideration at the Company's
2001 Annual Meeting of Shareholders must be received by the Company no later
than September 23, 2000 in order that they may be considered for inclusion in
the proxy statement and form of proxy relating to that meeting.
The attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the 2000 Annual Meeting. If a shareholder intends
to submit a proposal at the 2001 Annual Meeting that is not eligible for
inclusion in the proxy statement and proxy, the stockholder must do so no
later than December 7, 2000. If such a shareholder fails to comply with the
foregoing notice provision, the proxy holders will be allowed to use their
discretionary voting authority when the proposal is raised at the 2001 Annual
Meeting.
3
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PROPOSAL ONE
ELECTION OF DIRECTORS
Nominees
A board of seven (7) directors is to be elected at the Annual Meeting of
Shareholders. Unless otherwise instructed, the proxy holders will vote the
proxies received by them for the Company's seven (7) nominees named below, all
of which are presently directors of the Company. In the event that any nominee
of the Company is unable or declines to serve as a director at the time of the
Annual Meeting of Shareholders, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill the vacancy. The
Company is not aware of any nominee who will be unable or will decline to
serve as a director. In the event that additional persons are nominated for
election as directors, the proxy holders intend to vote all proxies received
by them in such a manner (in accordance with cumulative voting) as will assure
the election of as many of the nominees listed below as possible, and, in such
event, the specific nominees to be voted for will be determined by the proxy
holders. The term of office for each person elected as a director will
continue until the next Annual Meeting of Shareholders or until a successor
has been elected and qualified.
Vote Required
If a quorum is present and voting, the seven (7) nominees receiving the
highest number of votes will be elected to the Board of Directors (the
"Board"). Votes withheld from any nominee are counted for purposes of
determining the presence or absence of a quorum. Abstentions and broker non-
votes will be counted as present for the purposes of determining if a quorum
is present.
Nominees
The names of the nominees and certain information about them are set forth
below:
<TABLE>
<CAPTION>
Director
Name of Nominee Age Position with the Company Since
--------------- --- ------------------------- --------
<S> <C> <C> <C>
Alok Mohan(1)........................... 51 Chairman 1994
Douglas L. Michels...................... 45 President, Chief Executive
Officer and Director 1979
Robert M. McClure(2).................... 64 Director 1993
Gilbert P. Williamson(1)................ 62 Director 1993
R. Duff Thompson(2)..................... 49 Director 1995
Ronald Lachman(1)....................... 43 Director 1996
Ninian Eadie(2)......................... 62 Director 1996
</TABLE>
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(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Mohan became Chairman of the Board of Directors in April 1998. Prior to
this appointment, he served as President since December 1994 and as Chief
Executive Officer since July 1995 until April 1998. In December 1994, he was
elected as a director and assumed the position of President and Chief
Operating Officer. Prior to this appointment, beginning in May 1994, Mr. Mohan
served as Senior Vice President, Operations and Chief Financial Officer. Prior
to joining the Company, Mr. Mohan was employed with NCR Corporation, where he
served as Vice President and General Manager of the Workstation Products
Division, from January 1990 until July 1993 before assuming the position of
Vice President of Strategic Planning and Controller, with responsibility for
financial planning and analysis as well as worldwide reporting from July 1993
to May 1994. Mr. Mohan serves as a director of Rainmaker Systems, Inc. He also
serves on the Board of Directors of the following private companies: Jones
Business Systems, Inc, Crystal Graphics, Metering Technology Corporation,
Alpine Microsystems and InfoDream.
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Mr. Michels was named President and Chief Executive Officer in April 1998.
Mr. Michels was the principal architect of the Company's technology strategy
and served as the head of product development between June 1997 and April 1998
and as Chief Technical Officer between February 1993 and June 1997. Mr.
Michels has served as a director of the Company since 1979 and served as the
Company's Executive Vice President between 1979, when he co-founded the
Company, and April 1998. Mr. Michels is one of the founders of Uniforum, a
UNIX system user consortium, and served as its President from 1989 to 1990. He
also serves on the Board of Directors of two private companies: FastNet and
Arete, Inc.
Dr. McClure became a director of the Company in May 1993. Since 1978 he has
served as President of Unidot, Inc., which he founded to specialize in the
design of sophisticated computer software and hardware for equipment
manufacturers worldwide. Dr. McClure serves as a director of General
Automation, Inc. and IPT Corporation. He also serves on the Board of Directors
of one private company, Arete, Inc.
Mr. Williamson became a director of the Company in May 1993. From September
1991 until May 1993, he served as Chairman of the Board and Chief Executive
Officer of NCR Corporation, and also served as a member of the Board of
Directors of AT&T. He retired from NCR and the AT&T Board of Directors in May
1993. From January 1989 until September 1991, he served as President of NCR
and as a director, and prior to that time served as Executive Vice President
for marketing at NCR for three years. Mr. Williamson is a director of Roberds,
an Ohio-based retailer; and Fifth Third Bank (formerly Citizens Federal Bank,
F.S.B.) headquartered in Dayton, Ohio. He also serves on the Board of
Directors of three other private companies: Dean Investments, French Oil Mill
Machinery, and Dayton General Systems.
Mr. Thompson was appointed as a director of the Company in December 1995.
Mr. Thompson is Managing General Partner of EsNet, Ltd., an investment group
which is active in both technology and real estate ventures. From June 1994 to
January 1996, he served as Senior Vice President of the Corporate Development
Group of Novell, Inc. Prior to that time, he served as Executive Vice
President and General Counsel for WordPerfect Corporation, and before joining
WordPerfect Corporation in 1986, he was a partner with the Salt Lake City law
firm of Callister, Duncan & Nebeker. Mr. Thompson is a former Chairman of the
Board of the Business Software Alliance, the principal software industry
association dealing with software industry issues, including copyright
protection and public policy. He also serves on the Board of Directors of one
private company, Mediopoly.
Mr. Lachman became a director of the Company in February 1996. He is a
partner of Lachman Goldman Ventures, a venture capital company, that helps co-
found and invest in internet technology ventures including Sandpiper/Digital
Island, Connected Corporation, Internet Dynamics, Nexiv and a number of other
companies. Mr. Lachman has helped co-found or sits on the Board of Directors
of several of these companies. He founded Lachman Associates in January 1975
and served as its President from January 1975 until June 1989. In January of
1993 he founded Lachman Technology, serving as its President from January 1993
until May 1994. Both Lachman companies developed networking software shipped
with most UNIX servers. Mr. Lachman served as Executive Vice President of
Interactive Systems, a Kodak Company, from June 1989 through the end of 1992.
Mr. Eadie became a director of the Company in April 1996. He retired from
International Computers Limited ("ICL") in April 1997. Mr. Eadie served as
ICL's Group Executive Director, Technology, from January 1994 until July 1996,
responsible for research, development, manufacturing and third party
distribution of all ICL products. Prior to that he served as President of ICL
Europe from January 1990 until January 1994 and from May 1988 until January
1990, as President, ICL International. Mr. Eadie served on ICL's Board of
Directors from 1984
5
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until 1997, and was a member of ICL's Executive Management Committee from 1988
until 1997. He was a member of the SCO (UK) Advisory Board from June 1994
until his appointment to SCO's Board in April 1996.
There is no family relationship between any director or executive officer of
the Company.
Board Meetings and Committees
The Board of Directors of the Company held a total of six (6) meetings
during fiscal year 1999, two (2) of which were held by telephone conference
call. Each director attended at least seventy-five percent (75%) of the
cumulative meetings of the Board of Directors and committees thereof, if any,
upon which such director served. The Board of Directors has a Compensation
Committee, an Audit Committee and a Stock Option Committee. The Board of
Directors has no nominating committee or any committee performing such
functions.
The Compensation Committee, which consisted of directors Ronald Lachman,
Alok Mohan and Gilbert Williamson at the end of fiscal year 1999, met seven
(7) times during the fiscal year. Their successors on the Compensation
Committee will be determined at the February 22, 2000 Board meeting. This
Committee is responsible for determining salaries, incentives and other forms
of compensation for directors and executive officers of the Company and
administers various incentive compensation and benefit plans.
The Audit Committee, which consisted of directors Ninian Eadie, Robert
McClure and R. Duff Thompson at the end of fiscal year 1999, met four (4)
times during the fiscal year. Their successors on the Audit Committee will be
determined at the February 22, 2000 Board meeting. This Committee is
responsible for overseeing actions taken by the Company's independent auditors
and reviewing the Company's internal financial controls.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for directors and officers of
the Company. Mr. Michels, who served as President and Chief Executive Officer
of the Company during fiscal year 1999, is not a member of the Compensation
Committee and cannot vote on matters decided by the Committee. Mr. Mohan, who
served as President and Chief Executive Officer of the Company during fiscal
year 1998, became a member of the Compensation Committee in February 1999, he
has participated in the discussions and decisions regarding salaries and
incentive compensation for all employees of and consultants to the Company,
except that Mr. Mohan has been excluded from discussions and decisions
regarding stock grants to employees and consultants and his own compensation.
Mr. Michels has also participated in the discussions and decisions regarding
salaries and incentive compensation for all employees of and consultants to
the Company, except that Mr. Michels has also been excluded from discussions
and decisions regarding his own salary and incentive compensation. No
executive officer of the Company serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officer
serving as a member of the Company's Board of Directors or compensation
committee ("Interlock"). There are no Interlocks between the Company's Board
of Directors or Compensation Committee and boards of directors or compensation
committees of other companies.
6
<PAGE>
PROPOSAL TWO
APPROVAL OF AMENDMENT TO THE 1994 INCENTIVE STOCK OPTION PLAN
At the Annual Meeting, the shareholders are being asked to approve an
amendment to the Company's 1994 Incentive Stock Option Plan (the "Option
Plan") to increase the number of shares of Common Stock reserved for issuance
thereunder by 3,000,000 shares.
The foregoing amendment was approved by the Board of Directors on November
16, 1999. The adoption of the 1994 Plan, the successor to the Company's 1984
Incentive Stock Option Plan, was approved by the Board of Directors and by the
shareholders in February 1994. As of the Record Date, options to purchase an
aggregate of 9,449,190 shares were outstanding and 2,018,508 shares were
available for future grant. In addition, 5,545,967 shares had been purchased
pursuant to the exercise of stock options granted under the Option Plan. The
Option Plan authorizes the Board of Directors to grant incentive and
nonstatutory stock options to eligible employees and consultants of the
Company. The Option Plan is structured to allow the Board of Directors broad
discretion in creating equity incentives in order to assist the Company in
attracting, retaining and motivating the best available personnel for the
successful conduct of the Company's business.
During fiscal year 1999, the Board of Directors granted options to purchase
2,969,403 shares of common stock under the Option Plan. The Board of Directors
believes that equity incentives in the form of stock options or stock purchase
rights are an integral part of the Company's overall compensation program and
an effective way to provide incentives to employees. The Company's standard
vesting program provides that options become exercisable at a rate of one-
fourth ( 1/4) of the shares subject to the option vest twelve months after the
vesting commencement date, and one sixteenth ( 1/16) of the shares subject to
such option vest each three (3) months thereafter. This results in long term
incentives for the employees, which benefit the Company because the employees'
stock options are earned over a four-year period.
Vote Required and Board of Director Recommendation
The affirmative vote of a majority of the Votes Cast will be required under
California law to approve the amendment to the Option Plan. An abstention or
non-vote is not an affirmative vote and, therefore, will have the same effect
as a vote against the proposal.
The Board of Directors unanimously recommends a vote "FOR" the amendment to
the Option Plan.
Summary of the Option Plan
The essential features of the Option Plan are outlined below.
Purpose
The purposes of the Option Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employees and consultants of the Company and to promote the
success of the Company's business.
Eligibility
The Option Plan provides that options may be granted to any director,
officer, employee or consultant of the Company or any of its designated
subsidiaries. Incentive stock options may be granted only to employees
(including officers and employee-directors). The Board of Directors or a
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committee of the Board (for the purposes of this plan description, "Board"
shall mean either the Board or a committee appointed by the Board) selects the
recipients of awards under the Option Plan and determines the number of shares
to be subject to each option.
Administration; Limits on Grants
The Option Plan provides for administration by the Board. The Option Plan is
administered so as to satisfy certain requirements under the federal
securities laws, including under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), applicable California corporate law, and the
Internal Revenue Code of 1986, as amended (the "Code"). Except as noted below,
the Board has full power to select, from among the employees and consultants
eligible for awards, the individuals to whom awards will be granted, to make
any combination of awards to any participant and to determine the specific
terms of each grant, subject to the provisions of the Option Plan. The
interpretation and construction of any provision of the Option Plan is within
the sole discretion of the Board, whose determination is final and conclusive.
The Option Plan places specific limitations on the discretion allowed to the
Board in granting options and stock purchase rights to officers. These
limitations are intended to preserve the Company's ability to deduct for
federal income tax purposes the compensation expense relating to stock options
and stock purchase rights granted to certain executive officers under the
Option Plan. Without these provisions in the Option Plan, the federal income
tax legislation enacted in August 1993 would limit the Company's ability to
deduct such compensation expense. The limitations provide that no officer
shall be granted, in any fiscal year or over the remaining term of the Option
Plan, options and stock purchase rights to purchase more than the number of
shares issuable under the Option Plan.
The limits imposed by the August 1993 tax legislation on the Company's
ability to deduct compensation paid to certain of the Company's executive
officers apply not only to the persons currently serving in the effected
group, but also may be interpreted to apply to any person who in the future
becomes one of the effected group of executive officers. However, the limits
on deductibility do not apply to compensation attributable to stock options or
stock purchase rights if, among other things, the plan under which the options
or rights are granted includes limits on the discretion to make grants such as
those described above. The limits on the discretion of the Board as to
individual grants have been included in the Option Plan solely to preserve the
Company's ability to deduct such compensation. To the extent the Board
determines in the future that such limitations are not required to preserve
the deductibility of compensation related to such stock options and
appreciation rights, the Board may modify or eliminate these limitations.
See discussion below under "Certain United States Federal Income Tax
Information" for a summary of the general rules governing the availability to
the Company of tax deductions in connection with stock options or stock
purchase rights granted under the Option Plan.
Terms of Options
Each option is evidenced by a written stock option agreement between the
Company and the optionee and is subject to the terms and conditions listed
below, but specific terms may vary:
Exercise of the Option: The Board of Directors determines when options
granted under the Option Plan may be exercised. An option is exercised by
giving written notice of exercise to the Company, specifying the number of
full shares of Common Stock to be purchased and tendering payment to the
Company of the purchase price. Payment for shares issued upon exercise of an
option may consist of cash, check, promissory note, exchange of shares of the
Company's Common Stock or such other consideration as determined by the Board
of Directors.
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Exercise Price: The exercise price of options granted under the Option Plan
is determined by the Board of Directors, but the exercise price of incentive
stock options may not be less than one hundred percent (100%) of the fair
market value of the Company's Common Stock, which is defined to be the closing
price as reported by the Nasdaq National Market, on the last market trading
day prior to the date of the grant of the option. In the case of incentive
stock options granted to an optionee who owns more than ten percent (10%) of
the voting power or value of all classes of stock of the Company, the exercise
price must be not less than one hundred and ten percent (110%) of the fair
market value on the date of grant. In the case of nonstatutory stock options
it is currently anticipated that the exercise price will generally not be less
than eighty-five percent (85%) of the fair market value of the Company's
Common Stock on the date of grant, the Option Plan provides that the exercise
price of nonstatutory stock options shall be determined by the Board. The
closing sale price of the Company's Common Stock on the Record Date was
$28.875.
Termination of Employment: The Option Plan provides that if the optionee's
employment or consulting relationship with the Company is terminated for any
reason, other than death or permanent disability, an option may thereafter be
exercised (to the extent it was then exercisable) within such time period as
is determined by the Board (which shall be no more than three months in the
case of an incentive stock option), subject to the stated term of the option.
If the optionee's employment or consulting relationship with the Company
terminates as a result of the optionee's permanent disability, the optionee
may exercise an option at any time within a period determined by the Board not
to be less than six (6) months or, in the case of an incentive stock option,
and not to exceed twelve (12) months following the date of such termination
(but in no event later than the expiration of the term of the option), but
only to the extent that the optionee was entitled to exercise the option on
the date of such termination.
Death: If an optionee should die while an employee or a consultant of the
Company, the optionee's estate may exercise an option until the term of the
option or other shorter period set forth in the option agreement, expires, but
only to the extent that the optionee would have been entitled had the optionee
continued living and remained in continuous status as an employee or
consultant for six (6) months after date of death.
Termination of Options: The terms of options granted under the Option Plan
may not exceed ten (10) years from the date of grant. However, any incentive
stock option granted to an optionee who, at the time such option is granted,
owned more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or a parent or subsidiary corporation, may not
have a term of more than five (5) years. No option may be exercised by any
person after such expiration.
Non-transferability of Options: All options are non-transferable by the
optionee, other than by will or by the laws of descent and distribution, and
during the lifetime of the optionee may be exercised only by such optionee.
Rights Upon Exercise: Until an option has been properly exercised, that is,
proper written notice and full payment have been received by the Company, no
rights to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the optioned stock.
Other Provisions: The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Option Plan as may be
determined by the Board of Directors.
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Adjustment Upon Changes in Capitalization
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, an appropriate adjustment shall be made to the exercise price and
number of shares subject to each outstanding option and to the number of
shares which have been reserved for issuance under the Option Plan. In the
event of the proposed dissolution or liquidation of the Company, all
outstanding options automatically terminate unless otherwise provided by the
Board. The Board of Directors may in such event and in its sole discretion
declare that any option shall terminate as of a fixed date and give each
optionee the right to exercise his or her option as to all or any part of the
optioned stock, including shares as to which the option would not otherwise be
exercisable. Subject to the change in control provisions described below, in
the event of a merger of the Company with another corporation, or the sale of
substantially all of the assets of the Company, the Option Plan provides that
each outstanding option shall be assumed or an equivalent option shall be
substituted by the successor corporation. If the successor corporation does
not agree to assume the option or to substitute an equivalent option, the
Board of Directors shall provide for the optionee to have the right to
exercise the option as to all of the optioned stock, including shares as to
which the option would not otherwise be exercisable.
Change in Control Provisions
The Option Plan provides that in the event of a "Change of Control" of the
Company (as defined below) any or all or none of the following acceleration
and valuation provisions shall apply, as determined by the Board of Directors
in its discretion in the event of a Change of Control: (i) all stock options
outstanding as of the date such Change of Control is determined to have
occurred that are not yet exercisable and vested on such date will become
immediately vested and fully exercisable and (ii) to the extent exercisable
and vested, the value of all outstanding options, unless otherwise determined
by the Board of Directors prior to any Change in Control but at or after the
time of grant, will be cashed out at the "Change in Control Price" (as defined
below) reduced by the exercise price applicable to such options. A "Change of
Control" means the occurrence of (i) the acquisition by a person or entity
(other than the Company, one of its subsidiaries or a Company employee benefit
plan or trustee thereof) of securities representing twenty-five percent (25%)
or more of the combined voting power of the Company, (ii) a transaction
approved by the shareholders and involving the sale of all or substantially
all of the assets of the Company or the merger or consolidation of the Company
with or into another corporation, other than a merger or consolidation where
the shareholders immediately prior to such transaction continue to own
securities representing at least seventy-five percent (75%) or more of the
combined voting power of the Company, or (iii) a change in the composition of
the Board of Directors occurring within a two-year period, as a result of
which fewer than a majority of the directors are incumbent directors. The
"Change in Control Price" shall be, as determined by the Board, (i) the
highest closing sale price of a share of Common Stock as reported by the
Nasdaq National Market at any time within the sixty (60) day period
immediately preceding the date of determination of the Change in Control Price
by the Board or (ii) the highest price paid or offered per share, as
determined by the Board, in any bona fide transaction or bona fide offer
related to the Change in Control of the Company at any time within such sixty
(60) day period or (iii) such lower price, as the Board, in its discretion,
determines to be a reasonable estimate of the fair market value of a share of
Common Stock.
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Amendment and Termination
The Board of Directors may amend, alter, suspend or terminate the Option
Plan at any time or from time to time, but any such amendment, alteration,
suspension or termination shall not adversely affect any option then
outstanding under the Option Plan, without the consent of the holder of the
option. In any event, the Option Plan will terminate in 2004.
In addition, to the extent necessary to comply with Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or with Section 422 of the Code
(or any other applicable law or regulation), the Company shall obtain
shareholder approval of any amendment of the Option Plan in such a manner and
to such a degree as required.
Certain United States Federal Income Tax Information
Options granted under the Option Plan may be either "incentive stock
options," as defined in Section 422 of the Code, or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
income either at the time the option is granted or upon its exercise, although
the exercise may subject the optionee to the alternative minimum tax. Upon a
sale or exchange of the shares more than two years after the grant of the
option and one year after its exercise, any gain or loss will be treated as
long-term capital gain or loss. If these holding periods are not satisfied
("premature disposition"), the optionee will recognize ordinary income at the
time of the sale or exchange equal to the difference between the exercise
price and the lower of (i) the fair market value of the shares on the date of
exercise or (ii) the sale price of the shares. A different rule for measuring
ordinary income upon such a premature disposition may apply if the optionee is
also an officer, director, or ten percent (10%) shareholder of the Company.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as long-
term or short-term capital gain or loss, depending on the holding period.
Generally, the Company will be entitled to a deduction in the same amount as
the ordinary income recognized by the optionee at the time of such
disposition.
Options that do not qualify as incentive stock options are referred to as
nonstatutory options. An optionee will not recognize income at the time a
nonstatutory option is granted. However, upon its exercise, the optionee will
recognize ordinary income generally measured as the excess of the then fair
market value of the shares over the exercise price. Any ordinary income
recognized in connection with the exercise of a nonstatutory option by an
optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Generally, the Company will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the optionee
upon exercise of a nonstatutory stock option. Upon sale of the shares by the
optionee, any difference between the sale price and the optionee's purchase
price, to the extent not recognized as ordinary income as described above,
will be treated as long-term or short-term capital gain or loss, depending on
the holding period.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the Option Plan. It does not purport to be complete, and it does
not discuss the tax consequences of the optionee's death or the income tax
laws of any municipality, state or foreign country in which an optionee may
reside.
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Participation in the Option Plan
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table below (the "Named Executive Officers"), all
current executive officers as a group, all current directors who are not
executive officers as a group, and all other employees as a group, with
respect to the Option Plan: (i) the number of shares of the Company's Common
Stock subject to options granted under the Option Plan during fiscal year
1999; and (ii) the market value of the shares of Common Stock underlying the
options granted to such persons or group of persons during the fiscal year
ended September 30, 1999, minus the exercise price of such shares.
1994 Incentive Stock Option Plan
<TABLE>
<CAPTION>
Number of Shares
Subject to Options Dollar
Name of Individual or Identity of Group Granted Values ($)(1)
--------------------------------------- ------------------ -------------
<S> <C> <C>
Douglas L. Michels............................ 175,000 $3,425,284
John Luhtala.................................. 100,000 1,962,500
David McCrabb................................. 125,000 2,453,125
James Wilt.................................... 75,000 1,471,875
Steven M. Sabbath............................. 50,000 981,250
All Named Executive Officers as a group....... 525,000 10,294,034
All current executive officers as a group..... 850,000 17,056,534
All current nonemployee directors as a group.. 14,000 343,000
All other employees (including current
officers who are not executive officers) as a
group........................................ 2,105,403 49,112,185
</TABLE>
- --------
(1) Market value of shares based on a closing price of $28.875 on the Nasdaq
National Market on December 30, 1999, minus the exercise price. Shares
subject to an option with an option exercise price greater than $28.875
are considered to have zero dollar value.
PROPOSAL THREE
APPROVAL OF AMENDMENT TO THE 1993 DIRECTOR OPTION PLAN
At the Annual Meeting, the shareholders are being asked to approve an
amendment to the Company's 1993 Director Option Plan (the "Director Plan") to
increase the number of shares reserved for issuance under the Director Plan by
250,000 shares, bringing the total number of shares reserved under the
Director Plan to 1,400,000. The foregoing amendment was approved by the Board
of Directors in November 1999.
The Company believes that the ability to grant stock options to directors is
an important factor in attracting and retaining the best available individuals
for service as directors of the Company. Each year the Company reviews the
number of shares available for issuance under the Director Plan. Then, based
on the Company's estimates of the incentive value of stock options and the
number of current and potential future vacancies on the Board of Directors,
management presents to the Board a recommendation for the addition of shares
to the pool reserved for issuance under the Director Plan. The Board reviews
this recommendation and presents a proposal such as this one to the
shareholders for approval.
The Director Plan was adopted by the Board of Directors in March 1993 and
approved by the Company's shareholders in May 1993. As of the Record Date,
options to purchase an aggregate of 423,000 shares were outstanding, 93,000
options had been exercised and 634,000 shares remained available for issuance
pursuant to future option grants under the Director Plan. The range of
exercise prices per share for options outstanding under the Director Plan at
the Record Date was
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<PAGE>
from $4.375 to $12.00, and the weighted average exercise price per share was
approximately $7.167. Expiration dates for outstanding options range from May
15, 2003 to October 1, 2009.
Vote Required and Board of Director Recommendation
The affirmative vote of the majority of the Votes Cast will be required
under California law to approve the amendment to the Director Plan. An
abstention or non-vote is not an affirmative vote and, therefore, will have
the same effect as a vote against the proposal.
The Company's Board of Directors unanimously recommends a vote "FOR" the
amendment to the Director Plan.
The essential features of the Director Plan are outlined below.
Summary of the Director Plan
Purpose
The purposes of the Director Plan are to attract and retain the best
available individuals for service as nonemployee directors of the Company
("Outside Directors"), to provide additional incentive to the Outside
Directors and to encourage their continued service on the Board.
Administration
The Director Plan is administered by the Board of Directors, who receive
cash compensation for their attendance at the Board of Director's meetings and
an annual election to receive either cash compensation or an annual stock
option grant. All grants of options under the Director Plan are automatic and
non-discretionary pursuant to the terms of the Director Plan. All questions of
interpretation or application of the Director Plan are determined by the
Board, whose decisions are final and binding upon all participants.
Eligibility
Options under the Director Plan may be granted only to Outside Directors of
the Company. As of the Record Date, there were six (6) Outside Directors of
the Company, all of which have been nominated to serve as directors for the
next year.
Participation
Participation in the Director Plan provides for grants of options to be made
in two ways:
a. Each Outside Director is automatically granted an option to purchase
40,000 shares (the "Initial Grant") upon the date on which such individual
first becomes a director, whether through election by the shareholders of
the Company or by appointment by the Board of Directors in order to fill a
vacancy; and
b. Each Outside Director who continues to serve on the Board, receives on
the first day of each fiscal year of the Company, an option to purchase
6,000 shares (the "Annual Grant").
An Outside Director may elect to receive cash compensation in lieu of an
Annual Grant. Each Outside Director who makes such an election shall receive
cash compensation per Board meeting payable at a rate determined by the Board.
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<PAGE>
Terms of Options
Each option granted under the Director Plan is evidenced by a written stock
option agreement between the Company and the optionee. Options are generally
subject to the terms and conditions listed below.
Exercise of the Option. The Initial Grant becomes exercisable at the rate of
one-twentieth (1/20) every three months, with the effect that these options
are not exercisable as to the full number of shares until the fifth
anniversary of the date of their grant. The Annual Grant becomes exercisable
at the rate of one-fourth (1/4) every three months, with the effect that this
option is not exercisable as to the full number of shares until the first
anniversary of the date of its grant. Options granted under the Director Plan
expire ten (10) years following the date of grant. An option is exercised by
giving written notice of exercise to the Company specifying the number of full
shares of Common Stock to be purchased and by tendering payment of the
purchase price. Payment for shares purchased upon exercise of an option shall
be in such form of consideration as is authorized by the Director Plan and
determined by the Board, and such form of consideration may vary for each
option.
Exercise Price. The per share exercise price for shares to be issued
pursuant to exercise of an option under the Director Plan is one hundred
percent (100%) of the fair market value per share of the Company's Common
Stock which is defined to be the closing price as reported by the Nasdaq
National Market on the last market trading day prior to the date of the grant
of the option. As of the Record Date, the per share market value of the
Company's Common Stock was $28.875, based on the closing price on that date on
the Nasdaq National Market.
Termination of Continuous Status as a Director. If an optionee ceases to
serve as a director, he may, but only within twelve (12) months after the date
he ceases to be a director of the Company (three months for options granted
prior to June 1, 1994), exercise his option to the extent that he was entitled
to exercise it at the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that he was not entitled
to exercise the option at the date of such termination, or if he does not
exercise such option within the time specified, the option terminates.
Disability; Death. In the event that a director is unable to continue his
service as such with the Company as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Code) or if an optionee
should die while a director of the Company, he or his estate may, but only
within twelve (12) months from the date of termination due to disability or
death, exercise his option to the extent he was entitled to exercise his
option at the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that he was not entitled
to exercise the option at the date of such termination, or if he or his estate
does not exercise such option within the time specified, the option
terminates.
Liquidation or Dissolution. In the event of a proposed liquidation or
dissolution of the Company, options under the Director Plan shall terminate
unless otherwise provided by the Board. In such event, the Board, in its sole
discretion, may determine to make options immediately exercisable as to all
shares.
Change in Control. The Director Plan provides that in the event of a "Change
of Control" of the Company (as defined below) all stock options outstanding as
of the date such Change of Control is determined to have occurred that are not
yet exercisable and vested on such date will become immediately vested and
fully exercisable. A "Change of Control" means the occurrence of (i) the
acquisition by a person or entity (other than the Company, one of its
subsidiaries or a Company employee benefit plan or trustee thereof) of
securities representing fifty percent (50%)
14
<PAGE>
or more of the combined voting power of the Company, (ii) a transaction
involving the sale of all or substantially all of the assets of the Company or
the merger or consolidation of the Company with or into another corporation,
other than a merger or consolidation where the shareholders immediately prior
to such transaction continue to own securities representing at least fifty
percent (50%) or more of the combined voting power of the Company, or (iii) a
change in the composition of the Board as a result of which fewer than a
majority of the directors are incumbent directors. Incumbent directors are
directors who either (a) are directors of the Company as of the date the
Director Plan is approved by the shareholders, or (b) are elected, or
nominated for election, to the Board of Directors of the Company with the
affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination, but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors of the Company.
Capital Changes. In the event of any changes made in the Company's
capitalization that result in an exchange of Common Stock for a greater or
lesser number of shares without receipt of consideration by the Company,
appropriate adjustment shall be made by the Company in the exercise price and
in the number of shares subject to options outstanding under the Director
Plan, as well as the number of shares reserved for issuance under the Director
Plan.
Nontransferability of Option. Options granted pursuant to the Director Plan
may not be sold, pledged, assigned, hypothecated, transferred or disposed of
in any manner other than by will or by the laws of descent or distribution and
may be exercised, during the lifetime of the optionee, only by the optionee.
Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Director Plan as may be
determined by the Board.
Amendment and Termination of the Plan
The Board may at any time amend, alter, suspend or discontinue the Director
Plan, but no amendment, alteration, suspension or discontinuance shall be made
that would impair the rights of any optionee under any grant theretofore made
without such optionee's consent. In addition, to the extent necessary and
desirable to comply with Rule 16b-3 (or any other applicable law or
regulation, including the requirements of the Nasdaq National Market or an
established stock exchange), the Company shall obtain shareholder approval of
any amendment to the Director Plan in such a manner and to such a degree as
required.
Certain United States Federal Income Tax Information
Options granted pursuant to the Director Plan are "nonstatutory options" and
will not qualify for any special tax benefit to the optionee.
An optionee will not recognize any taxable income at the time the option is
granted. Upon exercise of the option, the optionee will generally recognize
ordinary income for federal tax purposes measured by the excess, if any, of
the fair market value of the shares over the exercise price. Because shares
held by directors might be subject to restrictions on resale under
Section 16(b) of the Securities Exchange Act of 1934, as amended, the date of
taxation may be deferred unless the optionee files an election with the
Internal Revenue Service pursuant to Section 83(b) of the Code within thirty
(30) days after the date of exercise. Upon sale of the shares by the optionee,
any difference between the sale price and the optionee's purchase price, to
the extent not recognized as ordinary income as described above, will be
treated as long-term or short-term capital gain or loss, depending on the
holding period.
15
<PAGE>
The Company will be entitled to a tax deduction in the amount and at the
time that the optionee recognizes ordinary income with respect to shares
acquired upon exercise of an option under the Director Plan. Generally, the
Company is not required to withhold any amount for tax purposes on any such
income included by the optionee.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant of options under
the Director Plan. It does not purport to be complete, and it does not discuss
the tax consequences of an optionee's death or the income tax laws of any
municipality, state or foreign country in which the optionee may reside.
PROPOSAL FOUR
APPROVAL OF AMENDMENT TO THE 1993 EMPLOYEE STOCK PURCHASE PLAN
General
The Company's 1993 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in March 1993 and approved by its
shareholders in May 1993 and is intended to qualify under Section 423 of the
Code. A total of 1,360,149 shares of Common Stock are currently reserved for
future issuance under the Purchase Plan.
Amendment to Increase the Number of Shares Reserved for Issuance Under the
Purchase Plan
On November 16, 1999, the Board of Directors approved an amendment to the
Purchase Plan to increase the number of shares reserved for issuance
thereunder by 750,000 shares to an aggregate of 4,750,000 shares. As of the
Record Date, 1,360,149 shares were reserved for future issuance under the
Purchase Plan, of which 2,639,851 shares had been issued.
The Board of Directors believes that it is in the best interests of the
Company to provide employees with an opportunity to purchase Common Stock of
the Company through payroll deductions. The Board of Directors believes that
the shares remaining available for issuance pursuant to the Purchase Plan are
insufficient for such purpose. Accordingly, at the Annual Meeting the
shareholders are being requested to consider and to approve the amendment of
the Purchase Plan to increase the number of shares reserved for issuance
thereunder by 750,000 shares.
Vote Required and Board of Directors Recommendation
The affirmative vote of a majority of the Votes Cast will be required under
California law to approve the amendment to the Purchase Plan. An abstention or
non-vote is not an affirmative vote and, therefore, will have the same effect
as a vote against the proposal.
The Board of Directors unanimously recommends a vote "FOR" the amendment to
the Purchase Plan.
Summary of the Purchase Plan
The essential features of the Purchase Plan are outlined below.
Purpose
The purpose of the Purchase Plan is to provide employees of the Company and
its majority-owned subsidiaries designated by the Board of Directors who
participate in the Purchase Plan with an opportunity to purchase Common Stock
of the Company through payroll deduction.
16
<PAGE>
Administration
The Purchase Plan is administered by the Board of Directors or a committee
appointed by the Board, and is currently being administered by the Board of
Directors. All questions of interpretation or application of the Purchase Plan
are determined in the sole discretion of the Board of Directors or its
committee, and its decisions are final and binding upon all participants.
Members of the Board of Directors who are eligible employees are permitted to
participate in the Purchase Plan but may not vote on any matter affecting the
administration of the Purchase Plan or the grant of any option pursuant to the
Purchase Plan. No member of the Board who is eligible to participate in the
Purchase Plan may be a member of the committee appointed to administer the
Purchase Plan.
Eligibility
Any person who is a regular employee of the Company (or any of its majority-
owned subsidiaries designated by the Board of Directors) and would not own
capital stock of the Company and or hold outstanding options to purchase such
stock possessing five percent (5%) or more of the total combined voting power
or value of all classes of capital stock of the Company or of any Subsidiary
is eligible to participate in the Purchase Plan. As of the Record Date
approximately 1,149 employees were eligible to participate in the Purchase
Plan and approximately 430 of such eligible employees were participating.
Offering Dates
The Purchase Plan is implemented by consecutive six (6) month offering
periods. Currently, the offering periods commence February 1 and August 1 of
each year. The Board of Directors has the power to alter the duration of the
offering periods without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first offering
period to be affected.
Participation in the Purchase Plan
Eligible employees become participants in the Purchase Plan by delivering to
the Company's payroll office a subscription agreement authorizing payroll
deductions. An employee who becomes ineligible to participate in the Purchase
Plan after the commencement of an offering may not participate in the Purchase
Plan until the commencement of the next offering period.
Purchase Price
The purchase price per share at which shares are sold under the Purchase
Plan is the lower of eighty-five percent (85%) of the fair market value of a
share of Common Stock on the date of commencement of the offering period or
eighty-five percent (85%) of the fair market value of a share of Common Stock
on the applicable exercise date within such offering period. The fair market
value of the Common Stock on a given date shall be the closing sale price as
reported by the Nasdaq National Market on such date.
Payment of Purchase Price; Payroll Deductions
The purchase price of the shares is accumulated by payroll deductions during
the offering period. The deductions may not exceed ten percent (10%) of a
participant's eligible compensation, which is defined in the Purchase Plan to
include all base pay, overtime pay, bonus and commissions during the offering
period, exclusive of all other amounts. A participant may institute decreases
in the rate of payroll deductions at any time and such decreases are
immediately effective.
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<PAGE>
All payroll deductions are credited to the participant's account under the
Purchase Plan; no interest accrues on the payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose and such payroll deductions need not be segregated.
Purchase of Stock; Exercise of Option
At the beginning of each offering period, by executing a subscription
agreement to participate in the Purchase Plan, each employee is in effect
granted an option to purchase shares of Common Stock. The maximum number of
shares placed under option to a participant in an offering period is
determined by dividing the compensation which such participant has elected to
have withheld during the exercise period by eighty-five percent (85%) of the
fair market value of the Common Stock at the beginning of the offering period
or on the applicable exercise date, whichever is lower; provided that such
number shall not exceed the number of shares determined by dividing $12,500 by
the fair market value of a share of the Company's Common Stock on the
enrollment date. Notwithstanding the foregoing, no employee of the Company and
its majority-owned subsidiaries may make aggregate purchases of stock under
the Purchase Plan and any other employee stock purchase plans qualified as
such under Section 423(b) of the Code in excess of $25,000 (determined using
the fair market value of the shares at the time the option is granted) during
any calendar year.
Withdrawal
While each participant in the Purchase Plan is required to sign a
subscription agreement authorizing payroll deductions, a participant may
terminate his or her participation in the Purchase Plan at any time by signing
and delivering to the Company a notice of withdrawal from the Purchase Plan.
All of the participant's accumulated payroll deductions will be paid to the
participant promptly after receipt of his or her notice of withdrawal and his
or her participation in the current offering period will be automatically
terminated, and no further payroll deductions for the purchase of shares will
be made during the offering period. No resumption of payroll deductions will
occur on behalf of such participant unless such participant re-enrolls in the
Purchase Plan by delivering a new subscription agreement to the Company during
the applicable open enrollment period preceding the commencement of a
subsequent offering period. A participant's withdrawal from the Purchase Plan
during an offering period does not have any effect upon such participant's
eligibility to participate in subsequent offering periods under the Purchase
Plan.
Termination of Employment
Termination of a participant's employment for any reason, including
retirement or death, cancels his or her participation in the Purchase Plan
immediately. In such event, the payroll deductions credited to the
participant's account will be returned to such participant or, in the case of
death, to the person or persons entitled thereto as specified by the employee
in the subscription agreement.
Capital Changes
If any change is made in the capitalization of the Company, such as stock
splits or stock dividends, which results in an increase or decrease in the
number of shares of Common Stock outstanding without receipt of consideration
by the Company, appropriate adjustments will be made by the Company to the
number of shares subject to purchase and to the purchase price per share,
subject to any required action by the shareholders of the Company. In the
event of the proposed dissolution or liquidation of the Company, the offering
period then in progress will
18
<PAGE>
terminate immediately unless otherwise provided by the Board of Directors. In
the event of the proposed sale of all or substantially all of the assets of
the Company or the merger of the Company with or into another corporation,
each outstanding option shall be assumed or an equivalent option shall be
substituted by the successor corporation, unless the Board of Directors
determines, in its discretion, to accelerate the exercisability of all
outstanding options under the Purchase Plan or to cancel the options and
refund all sums collected. The Board of Directors may also make provisions for
adjusting the number of shares subject to the Purchase Plan and the purchase
price per share if the Company effects one or more reorganizations, rights
offerings or other increases or reductions of shares of the Company's
outstanding Common Stock.
Certain United States Federal Income Tax Information
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and
423 of the Code. Under these provisions, no income will be taxable to a
participant until the shares purchased under the Plan are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant
will generally be subject to tax and the amount of the tax will depend upon
the holding period. If the shares are sold or otherwise disposed of more than
two years from the first day of the offering period, the participant will
recognize ordinary income measured as the lesser of (a) the excess of the fair
market value of the shares at the time of such sale or disposition over the
purchase price, or (b) an amount equal to fifteen percent (15%) of the fair
market value of the shares as of the first day of the offering period. Any
additional gain will be treated as long-term capital gain. If the shares are
sold or otherwise disposed of before the expiration of this holding period,
the participant will recognize ordinary income generally measured as the
excess of the fair market value of the shares on the date the shares are
purchased over the purchase price. Any additional gain or loss on such sale or
disposition will be long-term or short-term capital gain or loss, depending on
the holding period. The Company is not entitled to a deduction for amounts
taxed as ordinary income or capital gain to a participant except to the extent
that it is entitled to a deduction for ordinary income recognized by
participants upon a sale or disposition of shares prior to the expiration of
the holding period(s) described above.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and the Company with respect to the shares purchased
under the Purchase Plan. It does not purport to be complete, and it does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
Stock Price
The closing price of a share of the Common Stock on the Nasdaq National
Market on the Record Date was $28.875.
19
<PAGE>
Participation in the Purchase Plan
The Company cannot now determine the number of shares to be purchased in the
future by the Named Executive Officers, all current executive officers as a
group, or all other employees (including current officers who are not
executive officers) as a group. In fiscal year 1999, however, the following
shares of Common Stock were purchased by such persons pursuant to the Purchase
Plan.
<TABLE>
<CAPTION>
Number
of Dollar
Name or group Shares Value(1)
------------- ------- ---------
<S> <C> <C>
Douglas L. Michels........................................... -- $ --
John Luhtala................................................. -- --
David McCrabb................................................ 5,909 14,976
James Wilt................................................... -- --
Steven M. Sabbath............................................ -- --
All Named Executive Officers as a group...................... 5,909 14,976
All current executive officers as a group.................... 8,127 21,061
All other employees (including current officers who are not
executive officers as a group).............................. 581,841 1,479,648
</TABLE>
- --------
(1) Market value of shares on the date of purchase, minus the purchase price
under the Purchase Plan.
PROPOSAL FIVE
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected PricewaterhouseCoopers LLP as
independent public accountants to audit the consolidated financial statements
of the Company for the fiscal year ending September 30, 2000 and recommends
that shareholders vote for ratification of such appointment. In the event of a
negative vote on ratification, the Board of Directors will reconsider its
selection.
PricewaterhouseCoopers LLP has audited the Company's financial statements
since January 1, 1998. Representatives of PricewaterhouseCoopers LLP are
expected to be present at the meeting with the opportunity to make a statement
if they desire to do so and are expected to be available to respond to
appropriate questions.
The Board of Directors unanimously recommends a vote "FOR" the ratification
of the appointment of PricewaterhouseCoopers LLP as independent public
accountants.
20
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
Executive Compensation
Summary Compensation Table
The following table sets forth the compensation paid by the Company during
the three fiscal years, to (i) the Company's Chief Executive Officer, and (ii)
each of the four other most highly compensated executive officers of the
Company, whose salary plus bonus exceeded $100,000 in fiscal year 1999:
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
---------------------------------------- ------------
Securities All Other
Name and Principal Other Annual Underlying Compensation
Position Year Salary($)(1) Bonus($)(2) Compensation($) Options(#) ($)(3)
- ------------------ ---- ------------ ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Douglas L. Michels..... 1999 278,343 168,379 560(4) 175,000 3,000
President, Chief 1998 279,300 68,242 1,901(5) 413,027 4,585
Executive Officer 1997 258,395 70,056 -- 198,000(6) 3,000
John Luhtala(7)........ 1999 240,984 110,795 5,678(8) 100,000 3,000
Former Senior Vice
President, 1998 208,765 38,793 -- 70,000 6,873
Operations and Chief 1997 127,365 70,889 -- 280,000(9) 5,324
Financial Officer
David McCrabb.......... 1999 286,410 233,574 5,749(10) 125,000 245
Executive Vice 1998 186,989 21,512 5,749(10) 500,000 --
President, Worldwide 1997 167,222 63,879 4,909(10) 361,000(11) --
Sales & Field
Operations
James Wilt(12)......... 1999 229,335 102,497 -- 75,000 --
Senior Vice President, 1998 213,311 44,910 288(13) 245,000 --
Products
Steven M. Sabbath...... 1999 231,800 113,077 4,153(14) 50,000 3,000
Senior Vice President, 1998 203,277 48,064 -- 35,000 7,153
Law and Corporate 1997 192,718 56,785 4,922(14) 217,000(15) 3,000
Affairs and Secretary
</TABLE>
- -------
(1) Includes salary earned in the applicable fiscal year but paid or to be
paid in the following fiscal year.
(2) The Company pays bonuses to executive officers as determined by the Board
of Directors. The bonuses for each executive officer are based on the
officer's base salary, the Company's financial performance and individual
performance during the fiscal year. Includes bonuses earned in the
applicable fiscal year but paid or to be paid in the following fiscal
year.
(3) The dollar amounts in this column include premium payments made by the
Company with respect to insurance policies for the Named Executive
Officers for which the Company is not a beneficiary. In addition, the
dollar amounts in this column include 401(k) contributions for the
following persons in the amount of $3,000 for 1999, 1998 and 1997 paid by
the Company on behalf of Mr. Luhtala, Mr. Michels, and Mr. Sabbath; and
401(k) contributions in the amount of $245 for 1999 on behalf of Mr.
McCrabb.
(4) Represents annual airline club membership fees.
(5) Includes amounts reimbursed for car expenses ($1,676) and airline club
membership ($225).
(6) Includes 104,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
(7) Mr. Luhtala resigned from the Company as Senior Vice President,
Operations, and Chief Financial Officer effective on December 10, 1999.
(8) Represents American Bar Association membership dues ($305) and amounts
reimbursed for tax consulting services.
(9) Includes 110,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
21
<PAGE>
(10) Represents amounts reimbursed for tax consulting services.
(11) Includes 161,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
(12) Mr. Wilt became an Executive Officer of the Company in May 1998.
(13) Represents amounts reimbursed for an annual Post Office box fee.
(14) Represents amounts reimbursed for tax consulting services.
(15) Includes 108,000 shares issuable upon the exercise of options granted
pursuant to the Company's Option Exchange Program on July 18, 1997.
22
<PAGE>
Option Grants in Fiscal Year 1999
The following table sets forth each grant of stock options during the fiscal
year ended September 30, 1999 to the Named Executive Officers:
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants for Option Term(3)
---------------------------------------------- -------------------
Percent of
Number of Total Option Exercise
Option Shares Granted Price
Shares to Employees in ($ per Expiration
Name Granted(1) Fiscal Year(2) share) Date 5%($) 10%($)
- ------------------------ ---------- --------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglas L. Michels...... 9,828 .3% 10.175 09/21/04 $ 16,026 $ 46,410
165,172 5.6 9.25 09/21/09 960,851 2,434,985
John Luhtala............ 17,984 0.6% 9.25 09/21/09 $104,618 $ 265,122
82,016 2.8 9.25 09/21/09 477,110 1,209,090
David McCrabb........... 125,000 4.2% 9.25 09/21/09 $727,159 $1,842,765
James Wilt.............. 64,190 2.2% 9.25 09/21/09 $373,411 $ 946,297
10,810 0.4 9.25 09/21/09 62,885 159,362
Steven M. Sabbath....... 18,367 0.6% 9.25 09/21/09 $106,846 $ 270,768
31,633 1.1 9.25 09/21/09 184,018 466,337
</TABLE>
- --------
(1) All options were granted under the Option Plan. The option exercise price
of all stock options granted under the Option Plan is generally equal to
the fair market value of the shares of Common Stock on the day prior to
the date of grant. The options have a term of 10 years (5 years in the
case of incentive stock options granted to Mr. Michels) and generally vest
at the rate 25% of the shares subject to the option per year in which the
optionee remains in continuous status as an employee or consultant.
(2) The Company granted options to purchase an aggregate of 2,969,403 shares
in fiscal year 1999.
(3) Potential realizable values are based on assumed annual rates of return
specified by the Securities and Exchange Commission. The Company's
management cautions shareholders and option holders that such increases in
values are based on speculative assumptions and should not be the basis
for expectations of the future value of their holdings.
23
<PAGE>
Aggregated Option Exercises in Fiscal Year 1999
and Fiscal Year-End Option Values
The following table provides information on option exercises in fiscal year
1999 by the Named Executive Officers and the value of such officers'
unexercised options at September 30, 1999.
<TABLE>
<CAPTION>
Shares
Acquired Number of Value of Unexercised
on Value Unexercised Option Shares In-the-Money Option Shares On
Name Exercise Realized On September 30, 1999 September 30, 1999($)(2)
- ---- -------- -------- ------------------------- -----------------------------
Exercisable Unexercisable Exercisable(1) Un-exercisable
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Douglas L. Michels...... 0 213,775 538,252 $1,572,405 $3,260,675
John Luhtala............ 79,998 $417,560 22,500 237,502 132,044 1,312,514
David McCrabb........... 0 268,623 637,377 1,936,486 4,161,514
James Wilt.............. 0 138,174 276,926 1,038,730 1,836,376
Steven M. Sabbath....... 50,000 $410,806 87,751 147,749 636,851 856,993
</TABLE>
- --------
(1) Market value of underlying securities based on the closing price of the
Company's Common Stock on the Nasdaq National Market minus the exercise
price.
(2) Market value of securities underlying unexercised in-the-money options
based on the closing price of the Company's Common Stock on September 30,
1999 (the last trading day of fiscal year 1999) on the Nasdaq National
Market of $11.9375 per share, minus the exercise price.
Employment Contracts and Change-In-Control Arrangements
In March 1996, the Board of Directors approved a resolution providing that
prior to or after a change in control, as defined in the Option Plan, any
outstanding options held by corporate officers that were granted pursuant to
the Option Plan that are not at such time exercisable and vested shall become
fully exercisable and vested.
The Company adopted a change in control plan in June 1997 and, accordingly,
has entered into change in control agreements with each of the Named Executive
Officers. Pursuant to these agreements, each such officer is eligible to
receive, in the event that his or her employment is involuntarily terminated
within one year following a change in control of the Company, an amount equal
to the product of twelve (12) times his or her total monthly compensation
including targeted bonuses at 100% attainment, continuation of health
benefits, life insurance, long-term disability and other fringe benefit plans
available to him or her prior to the involuntary termination of employment for
twelve (12) months thereafter and accelerated vesting on all options held.
Pursuant to the terms of these agreements, a change in control is as defined
in the 1994 Incentive Stock Option Plan described herein.
There are no other employment contracts between the Company and any of the
executive officers named in the Summary Compensation Table above.
Compensation of Directors
During fiscal year 1999 the Company made payments to the Outside Directors
in an aggregate amount of fifty-two thousand, six hundred and twenty-five
dollars ($52,625) for attendance to Board meetings (including committee
meetings) during the fiscal year. The following payments were made to each
outside director: Ninian Eadie, eight thousand, five hundred dollars ($8,500);
Ronald Lachman, ten thousand dollars ($10,000); Robert McClure, ten thousand
dollars ($10,000); R. Duff Thompson, nine thousand, two hundred and fifty
dollars ($9,250); and Gilbert Williamson, ten thousand, seven hundred and
fifty dollars ($10,750). Pursuant to a consulting agreement with director
Williamson, the Company shall pay one thousand dollars ($1,000) a day, plus
reasonable expenses, for consulting services rendered to the
24
<PAGE>
Board of Directors and two thousand, five hundred dollars ($2,500) a day for
consulting services pertaining to the general business of the Company, to be
provided on an as-needed basis. During fiscal year 1999, the Company did not
retain Mr. Williamson for any consulting services and, therefore, no payments
were made in fiscal year 1999. The Company has a consulting agreement with
director McClure, pursuant to which the Company shall pay one thousand dollars
($1,000) per day, plus reasonable expenses, for consulting services pertaining
to the general business of the Company, to be provided on an as-needed basis.
In fiscal year 1999, the Company retained Mr. McClure for consulting services
in an aggregate amount of four thousand, one hundred and twenty-five dollars
($4,125). Directors are reimbursed for certain expenses in connection with
attendance at board and committee meetings.
Outside Directors (nonemployee directors) receive compensation for their
service on the Board pursuant to the Director Plan. This compensation is in
the form of stock options or in the case of the Annual Grant, which is
automatically granted on the first day of each fiscal year, they may elect to
be paid cash for each meeting attended, in lieu of a stock option. All current
outside directors have elected stock options for fiscal year 1999.
The Company's Director Plan, which provides for the grant in nonstatutory
stock options to nonemployee directors of the Company, was adopted by the
Board of Directors in March 1993 and approved by the shareholders in May 1993.
The Company has reserved a total of 1,400,000 shares of Common Stock for
issuance pursuant to the Director Plan. (See Proposal No. 3 for the proposed
addition of 250,000 shares.) The Director Plan is currently administered by
the Board of Directors. Under the Director Plan, each nonemployee director
automatically receives a nonstatutory option to purchase 40,000 shares of the
Company's Common Stock on the date upon which such person first becomes a
director (the "Initial Grant"). In addition, each nonemployee director who
remains in continuous status as a nonemployee director is automatically
granted a nonstatutory option (the "Annual Grant") to purchase 10,000 shares
of Common Stock on the first day of each fiscal year, 6,000 shares of which
are pursuant to the Director Option Plan and 4,000 of which are pursuant to
the Incentive Stock Option Plan.
An Outside Director may elect to receive cash compensation in lieu of an
Annual Grant. Each Outside Director who makes such an election shall receive
cash compensation per Board meeting payable at a rate determined by the Board.
In addition to the annual election of either cash compensation or stock
options grants, each Board member also receives the following payments for
meeting attendance: one thousand dollars ($1,000) per regularly scheduled
Board meeting attended in person, seven hundred fifty dollars ($750) per
special meeting, which may be attended telephonically, and seven hundred fifty
dollars ($750) per committee meeting, which may be attended telephonically.
Also, in the event that the Director who elected to receive options in lieu of
cash, is unable to attend a regularly scheduled Board meeting, he shall have
deducted from his next Annual Grant two thousand shares (2,000) for any such
meeting not attended.
Options granted under the Director Plan have a term of ten (10) years unless
terminated sooner upon termination of the optionee's status as a director or
otherwise pursuant to the Director Plan. Such options are not transferable by
the optionee other than by will or the laws of descent or distribution, and
each option is exercisable during the lifetime of the director only by such
director. The exercise price of each option granted under the Director Plan is
equal to the fair market value of the Common Stock on the date of grant.
Initial Grant options granted under the Director Plan vest cumulatively at the
rate of one-twentieth ( 1/20th) of the shares subject to the option for every
three months after the date of grant. Annual Grant options vest at a rate of
one-fourth ( 1/4th) of the shares subject to the option for every three months
after the date of grant.
In the event of a merger of the Company with or into another corporation or
a consolidation, acquisition of assets of like transaction involving the
Company immediately prior to occurrence of a change in control, any
outstanding option shall become fully exercisable and vested.
25
<PAGE>
Unless terminated sooner, the Director Plan will terminate in 2003. The
Board has authority to amend or terminate the Director Plan provided no such
action may affect options already granted and such options shall remain in
full force and effect. As of the Record Date, options to purchase 423,000
shares of Common Stock at a weighted average exercise price (per share) of
approximately $7.167 per share were outstanding and 634,000 shares remained
available for future option grants under the Director Plan.
Report of the Compensation Committee of the Board of Directors
The Compensation Committee of the Board of Directors serves as an
administrative arm of the Board to make decisions regarding executive
compensation and to make recommendations to the Board on compensation matters
generally. The following is the report of the Compensation Committee
describing compensation policies and rational applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the fiscal year ended September 30, 1999. The information
contained in such report shall not be deemed to be "soliciting material" or to
be "filed" with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filing under the
Securities Act or Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.
General
The Compensation Committee is a standing committee comprised of three
nonemployee directors. After evaluating management's performance the
Compensation Committee recommends compensation and pay levels to the full
Board for approval. Employee directors do not vote on their own compensation.
Stock option grants to executive officers are approved by this committee.
Overview and Policies for 1999
The goals of the Compensation Committee are to attract, motivate, reward and
retain the key executive talent necessary to achieve the Company's business
objectives and contribute to the long-term success of the Company. The
Compensation Committee currently uses salary, bonus and stock options to meet
these goals.
In fiscal year 1999, the Compensation Committee reviewed the compensation of
the Company's key executive officers by evaluating each executive's scope of
responsibility, prior experience and salary history, and also took into
account the salaries for similar positions at comparable high technology
companies. In reviewing the compensation, the Compensation Committee focused
on each executive's prior performance with the Company and expected
contribution to the Company's future success.
The Company provides long-term incentives to executive officers through the
Option Plan. The purposes of the Option Plan are to attract and retain the
best employee talent available and to create a direct link between
compensation and the long-term performance of the Company. In general, the
Option Plan incorporates four-year vesting periods to encourage employees to
remain with the Company. The size of each option grant is based on the
recipient's position and tenure with the Company, the recipient's past
performance, and the size of previous stock option grants, primarily weighted
toward the recipient's position. In fiscal year 1999, the Company continued
its policy of granting stock options to new employees and granted additional
stock options to employees, including executive officers, who had made and
were expected to make significant contributions to the Company's development.
These stock option grants were based primarily on the scope of the executive
officer's responsibilities at the Company and the remuneration to be paid to
such officer.
26
<PAGE>
The compensation for Douglas L. Michels in fiscal year 1999 was approved by
the Board of Directors. The Compensation Committee made its recommendation and
the Board made its determination of the Chief Executive Officer's compensation
after considering the same factors used to determine the compensation of other
executive officers.
Summary
The Compensation Committee believes that the Company's compensation have
been successful in attracting and retaining qualified employees and in linking
compensation directly to corporate performance relative to the Company's
goals. The Company's compensation policies will evolve over time as the
Company moves to attain the near-term goals it has set for itself while
maintaining its focus on building long-term shareholder value.
Members of the Compensation Committee:
Ronald Lachman
Alok Mohan
Gilbert P. Williamson
27
<PAGE>
Performance Graph
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the shareholders of the Company's Common Stock with
the cumulative return of the Nasdaq National Market Index and the Nasdaq
Computer and Data Processing Stocks Index for the period commencing September
30, 1994 and ending on September 30, 1999. The information contained in the
performance graph shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filing under the
Securities Act or Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing.
The graph assumes that $100 was invested on September 30, 1994 in the
Company's Common Stock and in each index, and that all dividends were
reinvested. No dividends have been declared or paid on the Company's Common
Stock. Shareholder returns over the indicated period should not be considered
indicative of future shareholder returns. The Company operates on a 52 week
fiscal year which ended on September 30, 1999.
09/1994 09/1995 09/1996 09/1997 09/1998 09/1999
------- ------- ------- ------- ------- -------
100.00 94.4 74.6 62.7 49.3 134.5
100.00 138.1 163.8 225.0 228.8 371.6
100.00 160.2 198.7 268.9 349.0 585.8
28
<PAGE>
Certain Transactions
In April 1999, the Company entered into a consulting agreement with Mr.
Mohan, pursuant to which Mr. Mohan became an external consultant to the
Company and his status as an employee ceased. The term of the agreement is for
one year, commencing April 21, 1999, and is renewable by mutual agreement of
both parties with approval by the Compensation Committee. As compensation for
Mr. Mohan's consulting services to the Company he receives a fee target at one
hundred and twenty-six thousand dollars ($126,000) per year, paid as follows:
ninety thousand dollars ($90,000) annually as a retainer; thirty-six thousand
dollars ($36,000) annually as a target incentive. Incentive payments shall be
made solely based upon the Company's performance against its Revenue and EPS
measures, paid in accordance with the provisions of the Company's Management
Incentive Plan. His stock options held previously continue to vest over the
term of the agreement and converted to non-statutory options. He will continue
to be covered under the Company's medical, dental and vision plans, however,
there will be no coverage for life insurance or disability insurance. In
addition, Mr. Mohan will forego any compensation normally accorded to members
of the Company's Board of Directors for participation on the Board or for
attendance at committee meetings and/or board meetings and will not be
entitled to additional stock options granted to board members on an annual
basis.
The Company has several license agreements with Microsoft pursuant to which
Microsoft has provided software technology. The Company paid royalties to
Microsoft in excess of $1,043,000 for fiscal year 1999.
The Douglas Michels Family Partnership and the Lawrence Michels Family
Limited Partnership are partners in Encinal Partnership No. 1 ("EP1"), which
leases to the Company certain office premises located in Santa Cruz,
California under two leases. The first lease commenced on January 1, 1989 and
had a ten-year term, with two options for the Company to renew for five-year
periods. The lease has been renewed through June 30, 2005. The lease covers
approximately 56,230 square feet of building space at a current cost of
approximately $88,010 per month, subject to an annual adjustment upward based
on the Consumer Price Index. The second lease commenced on July 1, 1991 and
had a seven-year term, with two options to renew for five-year periods. The
second lease has been renewed through June 30, 2005. The second lease covers
approximately 26,055 square feet of building space at a current cost of
approximately $31,268 per month, subject to an annual adjustment based on the
Consumer Price Index.
The third partner in EP1 is Wave Crest Development, Inc. ("Wave Crest").
Wave Crest leases to the Company 61,500 square feet of office space in Santa
Cruz. From time to time, Douglas Michels engages in real estate transactions
with Wave Crest and its president.
The Company believes that the transactions described above were on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties. All future transactions between the Company and any director or
executive officer are subject to approval by a majority of the disinterested
members of the Board of Directors.
In January 1994, the Company provided a loan to James Wilt in the form of a
promissory note (the "Note") in the principal amount of seventy-three
thousand, eight hundred and sixty-four dollars and fifteen cents ($73,864.15)
with interest from the date thereof at a rate of five percent (5%) per annum,
compounded semiannually, on the unpaid balance of such principal sum. The Note
was secured by a pledge of twenty thousand shares (20,000) of the Company's
common stock. The loan was paid in full in December 1999, by a return of 4,578
shares of the Company's common stock back to the Company, at a fair market
value of $21.5625 per share, equal to ninety-eight thousand, seven hundred and
thirteen dollars ($98,713).
29
<PAGE>
The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by California law.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than ten percent (10%) of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than ten
percent (10%) stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by the Company, or written
representations from certain reporting persons, the Company believes that all
Section 16 filing requirements applicable to its officer, directors and ten
percent (10%) shareholders during the fiscal year ended September 30, 1999
were complied with.
OTHER MATTERS
The Company knows of no other matters to be submitted at the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of Proxy to vote the shares they represent
as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: January 21, 2000
SCO, The Santa Cruz Operation, and the SCO logo, are trademarks or registered
trademarks of The Santa Cruz Operation, Inc. in the USA and other countries.
UNIX is a registered trademark of The Open Group in the United States and
other countries.
(C) 2000 The Santa Cruz Operation, Inc. All Rights Reserved.
30
<PAGE>
SKU#1187-PS-2000
<PAGE>
[1187 - THE SANTA CRUZ OPERATION, INC.] [FILE NAME: SCO11B.ELX] [VERSION - F(2)]
[01/14/00] [ORIG. 01/06/00]
DETACH HERE
PROXY
THE SANTA CRUZ OPERATION, INC.
2000 ANNUAL MEETING OF SHAREHOLDERS
February 22, 2000
This Proxy is solicited on behalf of the Board of Directors
The undersigned shareholder of THE SANTA CRUZ OPERATION, INC., a California
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated January 21, 2000, and hereby
appoints Douglas L. Michels and Steven M. Sabbath, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 2000 Annual Meeting
of Shareholders of THE SANTA CRUZ OPERATION, INC. to be held on February 22,
2000 at 3:00 p.m., local time, at The Westin Hotel, San Francisco Airport. One
Old Bay Shore Highway, Millbrae, California 94030, and at any adjournment or
adjournments thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth on the reverse side.
[SEE REVERSE] CONTINUED AND TO BE SIGNED ON REVERSE SIDE [SEE REVERSE]
SIDE SIDE
<PAGE>
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<CAPTION>
- ---------------------- --------------------
Vote by Telephone Vote by Internet
- --------------------- --------------------
<S> <C>
It's fast, convenient, and immediate! It's fast, convenient, and your vote is immediately
Call Toll-Free on a Touch-Tone Phone confirmed and posted.
1-877-PRX-VOTE (1-877-779-8683).
Follow these four easy steps: Follow these four easy steps:
1. Read the accompanying Proxy 1. Read the accompanying Proxy
Statement, Annual Report and Proxy Card. Statement, Annual Report and Proxy Card.
2. Call the toll-free number 2. Go to the Website
1-877-PRX-VOTE (1-877-779-8683). For http://www.eproxyvote.com/scoc
shareholders residing outside the United
States call collect on a touch-tone phone 3. Enter your 14-digit Voter Control Number
1-201-536-8073. indicated on your Proxy Card above your name.
3. Enter your 14-digit Voter Control Number 4. Follow the instructions provided.
located on your Proxy Card above your name.
4. Follow the recorded instructions.
Your vote is important! Your vote is important!
Call 1-877-PRX-VOTE anytime! Go to http://www.eproxyvote.com/scoc anytime!
Do not return your Proxy Card if you are voting by Telephone or Internet
[1187-THE SANTA CRUZ OPERATION, INC.] [FILE NAME: SCO11AELX] [VERSION-F(1)][01/14/00] [orig. 01/06/00]
DETACH HERE
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SCO11A
[X] Please mark
Votes as In
this example.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE AMENDMENT TO
THE 1994 INCENTIVE STOCK OPTION PLAN, FOR THE AMENDMENT TO THE 1993 DIRECTOR
OPTION PLAN, FOR THE AMENDMENT TO THE 1993 EMPLOYEE STOCK PURCHASE PLAN AND
FOR THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS
INDEPENDENT PUBLIC ACCOUNTANTS AND AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
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<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
1. To elect directors to serve until 2. To approve an amendment to the Company's 1994 [ ] [ ] [ ]
the next Annual Meeting of Share- Incentive Stock Option Plan (the "Option Plan")
holders and until their successors to increase the number of shares received for
are elected. issuance under the Option Plan by 3,000,000
shares.
Nominee: (01) Ninian Eadie, (02) Ronald
Lachman, (03) Robert M. McClure, (04) 3. To approve an amendment to the Company's 1993 [ ] [ ] [ ]
Douglas L. Michels, (05) Alok Mohan, Director Option Plan (the "Director Plan") to
(06) R. Duff Thompson and (07) Gilbert increase the number of shares reserved for
P. Williamson issuance under the Director Plan by 250,000
shares.
FOR WITHHELD
ALL [ ] [ ] FROM ALL 4. To approve an amendment in the Company's 1993 [ ] [ ] [ ]
NOMINEES NOMINEES Employee Stock Purchase Plan (the "Purchase
Plan") to increase the number of shares
[ ] reserved for issuance under the Purchase Plan
--------------------------------------- by 750,000 shares.
For all nominees except as noted above
5. To ratify the appointment of PricewaterhouseCoopers [ ] [ ] [ ]
LLP as independent public accountants of the Company
for the fiscal year ending September 30, 2000.
6. To transact such other business as may properly come before the meeting or
any adjournment thereof.
MARK HERE MARK HERE
FOR ADDRESS [ ] IF YOU PLAN [ ]
CHANGE AND TO ATTEND
NOTE AT LEFT THE MEETING
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